Edited version of private advice

Authorisation Number: 1052024050831

Date of advice: 24 August 2022

Ruling

Subject: Sale and subdivision of excess land

Issue 1 - Income Tax

Question

Will the sale of four subdivided lots be a mere realisation of a capital asset to you to be taxed under the capital gains provisions of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

Issue 2 - GST

Question

Are you carrying on an enterprise for goods and services tax (GST) purposes and will the sale of four subdivided lots be taxable supplies under section 9-5 of A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

No.

This ruling applies for the following periods:

Year ended 30 June 20XX

Year ended 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

You have an Australian Business Number (ABN) but is not registered for goods and services tax (GST).

You were registered for GST for one year in the past in your capacity as a consultant.

Your land is located on XXX square metres of land.

You sold four of your lots for a specified amount of money.

History of your property

The land was purchased by your parent on a specified date. At the time of purchase the land contained a creek and XX acres of vacant land.

Your parents proceeded to dam the creek and built a pump, which they moved into as their family home and initially raised their two children, you and your sibling.

In a specified year, your parents commenced construction of their main residence which you all moved into when it was practical to do so. The construction was gradually completed over the years.

Your parents lived in the family home until their passing. Your sibling lived in the family home until moving out in a specified year. Apart from temporarily relocating for work purposes, you have continued to live in the family home, and you continue to do so with your spouse.

Your parent bequeathed the property to their spouse and on the passing of their spouse, to you and your sibling as tenants in common (equal shares).

In or around a specified time the executors of your parent's estate agreed that the property was too big to maintain and considered subdividing and selling the excess land surrounding the family home. You spoke with local real estate agents about the value of the excess land should the land be subdivided to ensure your parent's estate received the market value of the land. The real estate agents advised that the land could not be sold for its true market value in one undeveloped lot. There was no consistent advice on how the excess land should be subdivided.

In a specified year, the executors of your parent's estate agreed that the property was too big to maintain and engaged professional consultants to advise on subdividing and selling the excess land surrounding the family home. The professional consultants proceeded to assist in obtaining a planning approval to subdivide the property into a specified number of lots. All but one lot would be sold by the estate and one lot (containing the family home) would be retained by the estate.

On a specified date, your remaining parent, your sibling and you entered into a Deed confirming:

•         you would acquire your sibling's right, title and interest to your parent's estate for market value; and

•         Your sibling would retire as an executor of your parent's estate; and

•         Your remaining parent would be replaced as an executor of your parent's estate by Person A, who was the solicitor engaged for the administration of the estate; and

•         Your remaining parent would continue to reside in the family home.

The executors of your parent's estate, being you and Person A, engaged the services of a company to undertake the property development between a specified timeframe to:

•         Carry out and complete all development and construction works as necessary to satisfy the conditions of the planning permit at its own expense.

•         Engage and oversee licensed real estate agents to market and sell a specified number of lots (with one lot to be retained by the executors of your parent's estate).

At a specified time, your remaining parent passed away. Your parents had lived in the family home from construction until they passed away and you continued to occupy the family home by yourself.

On or around a specified date the remaining lot was transferred from the executors of your parent's estate to you.

Decision to dispose of the excess land

You decided to subdivide your land into six lots and dispose of the excess land (being four of the six lots) as due to old age and diminishing mobility you were unable to fully enjoy all your land.

You were advised by a real estate agent that it was unlikely that your land could be sold for its true value as one undeveloped lot as you would not be able to retain your main residence without the land firstly being subdivided.

Previous experience in land development

In the past, you were involved in the development of the property of your parent's estate as an executor of the estate. Your involvement included engaging a company to undertake the development.

A number of years later, you were involved in the refurbishment and re-sale of a property. You were in a GST partnership as tenants in common with equal shares with other two persons who organised and supervised the refurbishment works where you were responsible for maintaining the accounts, documents and budget for the project. When the property was purchased, the intention was to make a profit. The property was sold at a specified date for a small profit.

Contracts

You provided us with details on a Land Development Deed, Power of Attorney and Deed of Variation that you entered into with Company Y.

Timeline for the land development

In a specified year, you engaged Person B to make preliminary enquiries with the Council as to whether the excess land surrounding your remaining lot could be subdivided and if it was possible for Person B to proceed and lodge a planning permit.

At a specified date, on your behalf Person B obtained a planning permit for the subdivision of the remaining lot into six lots. The lots would range from 800 to 1,000 square metres per lot. Your main residence would be located on a lot which you intended to retain.

In a specified year, you engaged Company X who were land development consultants, to review the planning permit to ensure that the excess land surrounding the family home would be realised for its true value. Company X endorsed the plans prepared by Person B and proceeded to lodge an application to amend the planning permit to extend the time by which civil construction was required to commence. The planning permit was subsequently approved and extended until a specified date.

In or around a specified year, you entered into discussions with Company Y, whose director was the person who undertook the development of the property of your parent's estate, regarding their interest in having full responsibility for the development of your property on terms similar to the development of the estate's property in the past.

On a specified date, you entered into a Land Development Deed with Company Y where they agreed and were given requisite authority to:

•         carry out and complete all development and construction works necessary to satisfy the conditions of the amended planning permit at their own expense without any inputs from you; and

•         engage, instruct and manage a licensed real estate agent to advertise and market for sale all subdivided lots.

For a specified time period, Company Y undertook the development of the remaining lot as per the terms in the varied Land Development Deed. You left the management and control of the development exclusively to Company Y.

On a specified date, you and Company Y entered into a Deed of Variation as you decided to also retain an additional lot.

You agreed to reimburse Company Y for the development and construction costs which totalled a specified amount and pay a development free from, but not limited to, the net proceeds which totalled a specified amount.

You entered into contracts with third party purchasers to sell the four lots.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 section 70-10

Income Tax Assessment Act 1997 section 104-10

Income Tax Assessment Act 1997 section 118-20

Income Tax Assessment Act 1997 section 118-25

Income Tax Assessment Act Part 3-1

Income Tax Assessment Act Part 3-3

A New Tax System (Goods and Services Tax) Act 1999 section 9-5

A New Tax System (Goods and Services Tax) Act 1999 section 9-20

A New Tax System (Goods and Services Tax) Act 1999 section 9-40

Reasons for decision

Issue 1 - Income Tax

Detailed reasoning

Taxation treatment of property sales

There are three ways the proceeds from a property development can be treated for taxation purposes:

•         assessable ordinary income under section 6-5 of the ITAA 1997 as income from carrying on a business or property development;

•         assessable ordinary income under section 6-5 of the ITAA 1997 as income from an isolated commercial transaction with a view to a profit; or

•         a realisation, often referred to as a 'mere realisation', of a capital asset, assessable under Parts 3-1 and 3-3.

Whether the proceeds are treated as income or capital will depend on the situation and circumstances of each particular case. No single factor will be determinative; rather, it will be a combination of factors that will lead to a conclusion as to the character of the activities.

Carrying on a business of property development

The Commissioner's view on whether a taxpayer is carrying on a business is found in Taxation Ruling TR 97/11 Income tax: am I carrying on a business of primary production? (TR 97/11). Although TR 97/11 deals with the issues in determining whether a taxpayer is carrying on a business of primary production, the same principles can be applied to the question of whether a taxpayer is carrying on any type of business including property development.

Paragraph 13 of TR 97/11 states that the following indicators are relevant in determining whether a taxpayer is carrying on a business:

•         whether the activity has a significant commercial purpose or character;

•         whether there is repetition and regularity of the activity;

•         whether the activity is of the same kind and carried on in a similar manner to that of the ordinary trade in that line of business;

•         whether the activity is planned, organised and carried on in a businesslike manner such that it is directed at making a profit;

•         the size, scale and permanency of the activity; and

•         whether the activity is better described as a hobby, a form of recreation or a sporting activity.

Whether a business is being carried on depends on the impression gained from looking at all the indicators against the case facts and whether these indicators provide the operations with a commercial flavour.

Isolated commercial transaction

Taxation Ruling TR 92/3 Income tax: whether profits on isolated transactions are income (TR 92/3) sets out the Commissioner's view on the application of the decision in Myer Emporium and provides guidance in determining whether the profits from isolated transactions are assessable under section 6-5 of the ITAA 1997 as ordinary income.

Paragraph 1 of TR 92/3 provides that the term isolated refers to:

•         those transactions outside the ordinary course of business of a taxpayer carrying on a business; and

•         those transactions entered into by non-business taxpayers.

It is not necessary that the intention or purpose of profit-making be the sole or dominant intention or purpose for entering into the transaction. It is sufficient if profit-making is a significant purpose.

Paragraph 6 of TR 92/3 provide that a profit from an isolated transaction or operation is generally income when both of the following elements are present:

•         the intention or purpose of a taxpayer in entering into the transaction was to make a profit or gain; and

•         the transaction was entered into, and the profit was made in the course of carrying on a business operation or commercial transaction.

Whether an isolated transaction is business or commercial will depend on the circumstances of each case. Where a taxpayer's activities have become a separate business operation or commercial transaction, the profits on the sale of the land can be assessed as ordinary income within section 6-5 of the ITAA 1997. Paragraph 13 of TR 92/3 lists the following factors which are relevant in considering whether an isolated transaction amounts to a business operation or commercial transaction include:

•         the nature of the entity undertaking the operation or transaction;

•         the nature and scale of other activities undertaken by the taxpayer;

•         the amount of money involved in the operation or transaction and the magnitude of the profit sough or obtained;

•         the nature, scale and complexity of the operation or transaction;

•         the manner in which the operation or transaction was entered into or carried out;

•         the nature of any connection between the relevant taxpayer and any other party to the operation or transaction;

•         if the transaction involves the acquisition and disposal of property, the nature of that property; and

•         the timing of the transaction or the various steps in the transaction.

Mere Realisation

Proceeds from the sale of property more often represent the mere realisation of capital assets, with gains subject to the CGT provisions in Part 3-1 and Part 3-3 of the ITAA 1997.

Paragraph 36 of TR 92/3 states the courts have often said that a profit on the mere realisation of an investment is not income, even if the taxpayer goes about the realisation in an enterprising way. The expression 'mere realisation' is used to contradistinguish a business operation or a commercial transaction carrying out a profit-making scheme.

The Full Federal Court decision in Stratham & Anor v FC of T 89 ATC 4070 held that the mere realisation of an asset at a profit did not necessarily render the profit taxable. The court was satisfied that the owners did not enter into the business of selling land and said there was nothing surprising in the fact that the owners applied themselves in an enterprising way to the realisation of a capital asset, in a manner calculated to maximise their receipts. But the fact that this occurred does not necessarily make the proceeds either profits from an undertaking or scheme, or income from a business. The court said:

It is well established... that the mere realisation of an asset at a profit does not necessarily render the profit taxable. The profit must arise from the carrying on of a business or a profit-making undertaking or scheme. The mere magnitude of the realisation does not convert it into such a business, undertaking or scheme; but the scale of the realisation activities is a relevant manner to be taken into account in determining the nature of the realisation, ie in determining whether the facts establish a mere realisation of a capital asset or a business or profit-making undertaking or scheme.

Application to your situation

It is accepted that your primary intention was to hold the land as your primary place of residence, and it was not acquired with the intention of reselling it. The land has been part of your primary residence for a considerable number of years. Age and diminishing mobility have reduced your ability to make use of and maintain the property. You decided to subdivide and dispose of your excess land. You will continue to use the house and remaining land surrounding your main residence.

By carrying out the subdivision by yourself rather than selling the property, you have retained control over the size and shape of the blocks.

It is unlikely that at the time of acquiring the property from your parent's estate the possibility of subdividing and selling at a profit in the future was a significant motive in the acquisition. It is likely that at some point since the acquisition, you would have become aware of this possibility and formed some future intent to sell the land for a significant gain.

You did not finance any of the development, it was financed by your developer, and they were then repaid for their costs on sale of the subdivided lots.

You engaged a professional developer to undertake the subdivision activities and you did not undertake any of the activities yourself. No other subdivision activities (apart from a refurbishment with you having an account's role) have been undertaken by you in the past and you do not intend to undertake any similar activities in the future.

Based on the information provided, there is nothing to suggest that the subdivision of the property was the beginning of a continuing business of property development. Your activities do not display the indicators of a business, being transactions entered into on a continuous and repetitive basis. Therefore, it is the Commissioner's view that the activities in relation to the subdivision are not those of any entity carrying on a business of buying, subdividing and selling subdivided land.

Making an assessment based on the factors set out in TR 93/2, it is the Commissioner's view that the subdivision of the property and the sale of the subdivided blocks of land will not be considered commercial in nature. On balance, you are not engaged in a profit-making undertaking, instead disposing of surplus land in an enterprising fashion, while retaining your house and surrounds for your own use.

Therefore, as you are not carrying on a business, and the subdivision activities are not an isolated profit-making transaction, the subdivision and sale will be a mere realisation of your property. Any profit arising from the sale of the subdivided blocks will be accounted for under the capital gains tax provisions in Part 3-1 and Part 3-3 of the ITAA 1997.

Issue 2 - GST

Detailed reasoning

Under section 9-5 of the GST Act, an entity makes a taxable supply where:

(a)   you make the supply for consideration; and

(b)   the supply is made in the course or furtherance of an enterprise that you carry on; and

(c)   the supply is connected with the indirect tax zone; and

(d)   you are registered or required to be registered for GST

However, the supply is not a taxable supply to the extent that it is GST-free or input taxed.

In your case, you will meet the requirements of paragraphs 9-5(a) and 9-5(c) of the GST Act as you will sell the subdivided lots for consideration; and the sale will be connected with the indirect tax zone since the subdivided lots are located in Australia.

Therefore, what remains to be determined is whether your sale of the subdivided lots will be a supply made in the course or furtherance of an enterprise that you carry on and whether you are required to be registered for GST as currently you are not registered for GST.

In the course or furtherance of an enterprise that you carry on

For the sale of the property to be made in the course or furtherance of your enterprise, the sale of the property must have a connection to your enterprise.

Goods and ServicesTax Ruling GSTR 2004/8 Goods and services tax: when does an entity have a decreasing adjustment under Division 132 (GSTR 2004/8) considers the meaning of 'in the course or furtherance of an enterprise'. At paragraph 28 it states:

28. For the sale of a thing to be made in the course or furtherance of your enterprise, the sale of the thing must have a connection with your enterprise. Whether a connection between the sale of the thing and your enterprise exists will depend on the facts and circumstances. The Explanatory Memorandum to the A New Tax System (Goods and Services Tax) Bill 1998 states:

'In the course or furtherance' is not defined but is broad enough to cover any supplies made in connection with your enterprise. An act done for the purpose or object of furthering an enterprise, or achieving its goals, is a furtherance of an enterprise although it may not always be in the course of that enterprise. 'In the course or furtherance' does not extend to the supply of private commodities, such as when a car dealer sells his or her own private car. See Case N43 (1991) 13 NZTC 3361.

Paragraph 29 of GSTR 2004/8 further states:

29.  Given the broad meaning of 'in the course or furtherance', a sale of a thing is capable of being made in the course or furtherance of an enterprise regardless of the extent to which it has a connection with the enterprise, so long as it has some connection. The GST Act does not require that the thing must be applied primarily or principally in carrying on the enterprise for the supply of the thing to be in the course or furtherance of an enterprise. Accordingly, a connection between the sale of the thing and your enterprise exists even if, at the time of its sale, the thing is applied in carrying on the enterprise to a minor or secondary extent.

The sale of the property will be in the course or furtherance of your enterprise where it has some connection with the enterprise. Paragraph 30 of GSTR 2004/8 considers characteristics which indicates strongly that the sale of a thing has a connection with your enterprise:

•         at the time of sale it formed part of the assets of your enterprise (for example, it is trading stock or a depreciable asset for income tax purposes);

•         at the time of sale it was applied in carrying on your enterprise to at least some extent; and

•         it is sold as a transaction of your enterprise.

Each of these points will indicate a connection and not all of the points need to be satisfied. The word 'Asset' is not defined in the GST Act. The Macquarie Dictionary online, www.macquariedictionary.com.au, accessed 5 July 2022, defines the term as 2. an item of property, as a building, a piece of equipment, etc...,3. an economic resource.... In this respect the property is not an asset of your enterprise which you are seeking to realise.

Note: trading stock and depreciable assets for income tax purposes are merely two types of assets and do not represent an exhaustive list of assets an enterprise can have.

You were previously registered for GST for your supply of civil engineering and major contract integration services. The facts and circumstances of the sale of the property establish an insufficient connection with your enterprise such that paragraph 9-5(b) of the GST Act will not be satisfied.

We now turn to determine if the sale of subdivided lots 3-6 will be made in the course or furtherance of an enterprise of property development that you carry on.

Course or furtherance of an enterprise of property development

A supply is a taxable supply, if among other things, the supply is made in the course or furtherance of an enterprise that you carry on.

The term 'enterprise' is defined for GST purposes in section 9-20 of the GST Act and includes, among other things, an activity or a series of activities done:

•         In the form of a business (paragraph 9-20(1)(a)) or

•         In the form of an adventure or concern in the nature of trade (paragraph 9-20(1)(b)).

The phase 'carry on' in the context of an enterprise incudes doing anything in the course of the commencement or termination of the enterprise.

Miscellaneous Taxation Ruling MT 2006/1 The New Tax System: the meaning of entity carrying on and enterprise for the purposes of entitlement to an Australian Business Number (MT2006/1) provides the Tax Office view on the meaning of 'enterprise' for the purposes of entitlement to an ABN.

Goods and Services Tax Determination GSTD 2006/6 Goods and Services Tax: MT 2006/1 have equal application to the meaning of 'entity' and 'enterprise' for the purposes of the A New Tax System (Goods and Services Tax) Act 1999, provides that the discussion on MT 2006/1 applies equally to the term 'enterprise' as used in the GST Act. Paragraph 159 of MT 2006/1 provides that whether or not an activity or series of activities amounts to an enterprise is a question of fact and degree having regard to all of the circumstances of the case.

In the form of a business

Paragraphs 170 to 179 of MT 2006/1 discuss factors to consider when determining whether an activity or series of activities are done in the form of a business.

Paragraph 178 of MT 2006/1, with reference to Taxation Ruling 97/11 Income tax: am I carrying on a business of primary production lists indicators of carrying on a business:

•         a significant commercial activity;

•         an intention of the taxpayer to engage in commercial activity;

•         an intention to make a profit from the activity;

•         the activity will be profitable;

•         the recurrent or regular nature of the activity;

•         the activity is systematic, organised and carried on in a business-like manner and records kept;

•         the activities are of a reasonable size and scale;

•         a business of product; and

•         the entity has relevant knowledge or skill.

Application in your case

Given the facts of this case, we consider that the sale of the property by you does not display the characteristics of a 'business' as listed above.

In the form of an adventure or concern in the nature of trade

Paragraphs 247 to 261 of MT 2006/1 outline some factors to determine whether the sale of an asset could be considered as a mere realisation of a capital or investment asset. The factors are:

•         subject matter of realisation

•         length of period of ownership

•         frequency or number of similar transactions

•         supplementary work on or in connection with the property

•         circumstance that were responsible for the realisation, and

•         motive

The subject matter

You have lived at the property which contained the family home for the majority of your life (except for temporarily relocating for work purposes) and continue to do so with your spouse.

The length of time of ownership

You have owned the property since a specified date.

The frequency and number of similar transactions

You have not previously undertaken a sale of this nature.

Supplementary work on or in connection with the property realised

You have not developed the land beyond what was necessary to secure council approval for the subdivision. You have not erected any building on the land.

The circumstances that were responsible for the realisation

You have decided to subdivide the property into 6 lots as it has become increasingly difficult and expensive to maintain. You have sold lots 3-6 and will retain lots 1 and 2 which will continue to be your residential property.

Motive

Although a profit may result from the sale of the subdivision, the length of time you held the property and your initial intentions as occupying the property as your family home, does not show that your initial intention in relation to this property was a profit making one.

In Summary

In your case, based on the factors above, we do not consider that your sale of the four subdivided lots to constitute an adventure or concern in the nature of trade.

The sale of the four subdivided lots will be a mere realisation of capital asset. As such, the sale of the subdivided lots will not be made in the course of an enterprise that you are carrying on. The requirement in paragraph 9-5(b) of the GST Act will not be satisfied.

As the requirement in paragraph 9-5(b) of the GST Act will not be satisfied, it is no longer necessary to determine if paragraph 9-5(d) of the GST Act will be satisfied.

The sale of the four subdivided lots will not be a taxable supply and you will not be liable for GST on the sale of the property in accordance with section 9-40 of the GST Act.